Comprehensive take on China's taxation

Published on Friday, 29 Jul 2011

Seminar participants are keen to know the accounting principles and taxation on the mainland.Photo: K.Y. Cheng

Bert KwokChengHe CPAPhotos: K.Y. Cheng

Inside Kornerstone Institute's lecture room in Central, the audience sat patiently, waiting for the seminar on China's tax system to start. They were not disappointed when Bert Kwok began his lecture on the "Principles of Accounting and Taxation in the PRC" and proved to be an engaging speaker.

Kwok is currently an executive partner of ChengHe CPA in Hong Kong and holder of a Chinese Institute of Certified Public Accountants (CICPA) qualification with the Association of International Accountants. Thus, he would be one of the best people to talk about the subject.

Kwok began the seminar by introducing Chinese accounting standards, the system of accounting that companies are now using on the mainland.

He said the Chinese accounting standards were unique because, unlike in most Western countries, China has a plethora of huge state-owned enterprises.

Kwok added that Chinese accounting standards were basically in convergence with the International Financial Reporting Standards (IFRS), an accounting system recognised globally and adopted by many other developed and free-market countries.

"Even the European Union (EU) has approved Chinese accounting standards," he said.

He disclosed that the EU recommended to the European Parliament that China's enterprises be allowed to enter the European market by the end of 2011, with audit reports using Chinese accounting standards. These companies need not adjust their reports by using IFRS.

This seems to be great news to China's enterprises. However, some attendees questioned whether mainland audit reports could be trusted. Kwok said it's quite common for the enterprises in China to have two, three or even four sets of accounts.

"They will usually have different sets of accounts shown to different parties. One for the bank, one for the boss and one for themselves," Kwok said.

Over the past couple of months, several Chinese enterprises listed in the United States have been delisted by US Securities and Exchange Commission after it discovered that most of these enterprises submitted inaccurate audit reports.

Kwok said these cases showed how serious the problem was. Investors often found it difficult to differentiate between accurate and inaccurate reports, he added.

Kwok said this was undoubtedly one of the major problems investors had to confront if they wanted to invest in China.

Moving on to the second part of the seminar, Kwok introduced the tax reforms to be carried out in China in the next five years.

"There was a major tax reform in 2008, and with the announcement of the 12th Five-Year Plan early this year, China will once again have another tax reform," he said.

Kwok said the new batch of tax reforms included value added tax (VAT), which would be expanded. In the meantime, the list of items subject to consumption tax would also be adjusted. High-energy and resource-consuming products would be included in the consumption tax list, while items such as cosmetics would be removed from the list because they were regarded as common items instead of luxuries, Kwok explained.

What's more, measures would be strengthened to stop tax evasion.

When doing business in China, it's common for investors to face some tax-related problems. "Low key is always the best solution - never to make it known to the public. All the parties should try to keep it as low key as possible. This is the golden rule to settle all the tax-related disputes and problems on the mainland," Kwok said.

The seminar, jointly organised by Classified Post and Kornerstone, was well-received. The audience mainly asked how to set up business and pay taxes on the mainland.

Tom Mou, director of a local English learning centre, said the seminar was informative. "I plan to set up a business on the mainland at the end of this year. So this seminar certainly helped me acquire necessary and valuable information," he said.

Mou said knowing more about the real situation when doing business in China did not discourage him, but it did persuade him to research more before proceeding.

Janet Tong, an accountant, agreed that taxation in China was like a riddle. "The problem is it changes all the time. That's why I keep on taking courses in various universities to keep up with the latest information regarding taxation in China," she said.

Tong said Kwok gave a clear introduction about issues relating to taxes and accounting on the mainland.

Joanna Han, who works as an accounting officer at a company which provides corporate services, said that Kwok's lecture was comprehensive.

"Sometimes some of our clients ask about taxation issues in China. That's why I need to learn more," she said, adding that she liked how Kwok presented and analysed real cases.